Laboratory Corporation of America Holdings (LH), or LabCorp, reported third-quarter 2014 adjusted earnings per share (EPS) of $1.80, unchanged from the year-ago quarter number. However, earnings steered ahead of the Zacks Consensus Estimate of $1.75.
On a reported basis, after including amortization (13 cents), restructuring and other special charges (8 cents), LabCorp’s net earnings came in at $137.2 million or $1.59 per share against net earnings of $148.3 million or $1.63 per share a year ago.
Quarter under Review
Revenues were up 6.1% year over year to $1,551.8 million in the third quarter, outpacing the Zacks Consensus Estimate of $1,505 million.
The company witnessed a 6.9% increase in testing volume (measured by requisitions and fold-in acquisitions) primarily due to organic growth which was partially offset by price and mix. On the other hand, the company reported poor revenue per requisition (down 0.7% year over year) that reflects Medicare payment reductions and unfavorable test mix.
However, we take a note that despite acquisitions reducing revenue per requisition approximately by 1%, revenue per requisition came in slightly favorable year over year for LabCorp’s peerQuest Diagnostics (DGX), as reported in its third-quarter 2014 results that released on Oct 23.
Gross margin fell 64 basis points (bps) to 36.8% in the quarter. Adjusted operating income declined 1.2% year over year to $265.5 million. This led to an adjusted operating margin of 17.1%, down 126 bps from the year-ago quarter. During the quarter under review, selling, general and administrative expenses shot up 9.6% to $305.7 million.
LabCorp exited the quarter with cash and cash equivalents of $575.7 million compared with $404.0 million at the end of 2013. Operating cash flow for the quarter was $175.6 million, down from the year-ago level of $234.2 million as the company used working capital to support its revenue growth. Free cash flow for the quarter came in at $123 million, down from $182.1 million in the third quarter of 2013.
During the quarter, LabCorp bought back stocks worth $66 million bringing its year-to-date share repurchase up to $228 million and was left with $824 million of authorization under the approved share repurchase plan. A consistent share buyback program led to a 4.8% decline in the outstanding share count.
Outlook
Backed by a decent third quarter performance, LabCorp raised its full-year 2014 revenue growth guidance to 3%over 2013 from 2% announced earlier. The current Zacks Consensus Estimate for revenues is pegged at $5,928 million.
EPS guidance has also been upgraded to the range of $6.70 to $6.80 from the earlier provided projection of $6.50 to $6.75. The current Zacks Consensus Estimate of $6.72 figures close to the lower end of the revised range.
In addition, free cash flow and capital expenditures are expected to remain in the bands of $555−$580 million and $200−$205 million, respectively.
Our Take
LabCorp posted a better-than-expected third quarter with top and bottom-line beats. Significant increase in test volume acted as the main impetus for the company’s top line in the reported quarter. We are also optimistic about the increased revenue and earnings outlook for 2014 implying improving industry trend. Moreover, share repurchase activity remains strong providing significant cushion to the company’s bottom line.
However, the current economic uncertainty continues to adversely affect LabCorp. The volume environment still remains challenging for testing laboratories and utilization weaknesses stands as looming headwinds. We are also concerned about the Medicare payment reductions (effective Jan 2013), molecular pathology codes and the implementation of sequestration. In addition, margins also continue to remain under pressure.
Nonetheless, LabCorp is leaving no stone unturned to consolidate operations and realize potential synergies. As part of its 5-pillar strategy, LabCorp is currently working hard on innovations in association with academic institutions to capture the growing lab testing market with its advanced assays and tools. Despite near-term challenges owing to reimbursement issues, the company remains focused on portfolio expansion to drive its top line. LabCorp is emphasizing particularly on the high-margin esoteric testing business, which is expected to contribute 45% of total sales in the next 3-5 years.
Zacks Rank
The stock currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same sector are Cardinal Health, Inc. (CAH) and Henry Schein, Inc. (HSIC), both carrying a Zacks Rank #2 (Buy).
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